1) Accelerating Inflation: The year-over-year rate of inflation as measured by the consumer price index (CPI) now stands at 1.9%. The six-month annualized inflation rate is only 1.4%, suggesting a near-term moderation in the price trend. Over the past ten years, the average annual rate of CPI inflation is 2.1%. The core CPI, which excludes the volatile food and energy sectors, shows a year-over-year gain of 2.2%, and a six-month annualized increase of 2.0%. Over the past year, energy prices are essentially unchanged and food prices have risen 1.6%.
The favorite inflation gauge of the Federal Reserve is the personal consumption expenditure (PCE) price index. Over the past year, the PCE price index has risen 1.8% and the PCE core price index has increased 1.9%. The Federal Open Market Committee (FOMC) has established a target level of 2.0% for core inflation based on the PCE index. Low inflation provides an underpinning for the Federal Reserve to implement a cautious and prudent approach to monetary policy decision making.
2) Payroll Growth: The nonfarm payrolls increase of 312,000 in December was the largest increase since February, and the prior two months were revised up by a total of 58,000 jobs. Also, the average workweek rose by six minutes to 34.5 hours. As more people joined the labor force, the unemployment rate increased to 3.9%, which is below the figure regarded as the full employment level by the FOMC.
Aggregate payrolls, which combine payrolls, hours, and earnings, increased 5.2%
on a year-over-year basis. This increase has positive implications for personal income and consumer spending growth in 2019. The labor participation rate now stands at 63.1%, equal to the highest rate since March 2014. The broadest measure of unemployment is the underemployment rate, which now stands at 7.6% and has re- turned to the levels that prevailed in 2007. This rate measures those working part- time for economic reasons along with the long-term unemployed.
Rising Unemployment Claims: New unemployment insurance claims are released weekly and provide data on the number of individuals filing for unemployment insurance for the first time. Claims are useful in measuring the health of the labor market in terms of layoff activity and a rising trend can serve as a harbinger of future economic weakness. The four-week moving average of new claims provides for the smoothing of weekly volatility. Weekly figures can be distorted by dislocations related to short-term factors, including extreme weather conditions.
3) Rising Unemployment Claims: New unemployment insurance claims are released weekly and provide data on the number of individuals filing for unemployment insurance for the first time. Claims are useful in measuring the health of the labor market in terms of layoff activity and a rising trend can serve as a harbinger of future economic weakness. The four-week moving average of new claims provides for the smoothing of weekly volatility. Weekly figures can be distorted by dislocations related to short-term factors, including extreme weather conditions.
The trend of initial unemployment claims has remained highly favorable over the last three years, and the four-week moving average remains close to 49-year lows. Most companies are currently retaining workers as the labor market tightens. The job quit rate suggests that worker confidence is high, and the number of job open- ings continues to outpace the number of qualified job applicants.
4) Inverted Yield Curve: The yield curve measures the current yield on U.S. Treasury securities over the full maturity range from short-term rates to the 30-year U.S. Treasury Bond. The slope of the yield curve shows the term structure of interest rates and provides a strong indication of the health of the economy. During the late stages of monetary tightening cycles, the yield curve tends to invert, as short-term rates exceed long-term rates. This typically occurs prior to the onset of recession, therefore yield curve analysis provides valuable input into the out- look for the economy and the stock market.
There have been seven recessions in the last half-century, and each one has been preceded by an inverted yield curve. When the yield curve is positive, as it is now, the risk of recession is low. We prefer to use the same yield curve measure that is included in the Leading Economic Index. This measure compares the current federal funds rate with the 10-year Treasury rate. The spread between these two rates has narrowed considerably over the past year while remaining positive. The federal funds rate is currently 2.40%, while the 10-year Treasury yield is 2.64% leaving a positive yield spread of 24 basis points.
5) Leading Economic Indicators: The Conference Board Leading Economic Index (LEI), which gauges future economic growth, edged down 0.1% in December based on the preliminary data which includes some estimated figures due to the temporary par- tial government shutdown. This follows a 0.2% increase in November and supports our view that Gross Domestic Product (GDP) growth will slow down in 2019.
In the second-half of 2018, the LEI increased 1.5%, considerably slower than the 2.7% growth during the first-half of 2018. Overall, the strengths among the lead- ing indicators remain more widespread than the weaknesses. The Coincident Economic Index, which measures current economic activity, increased 0.2% for the month and rose 1.2% during the six-month period through December, 2018.
The estimate for real GDP growth in calendar year 2019 remains within the 2.0% to 2.6% range. The key variable going forward is the extent to which the United States-China trade war impacts U.S. exports as well as imports to domestic companies and consumers. Continue to regard the trade war as the wildcard in the 2019 economic outlook.
The estimate for 2019 S&P 500 operating earnings remains within a range of $165 to $170, with the outcome of the trade war negotiations a factor in determining the eventual earnings figure. My estimated price/earnings ratio range of 16 to 17 times operating earnings provides the potential for the S&P 500 Index to challenge the 2900 level within the next year if the trade war is resolved - might go as high as 3000.
My estimate of FMV of S&P 500 is in the range of 2650 to 2890.
The favorite inflation gauge of the Federal Reserve is the personal consumption expenditure (PCE) price index. Over the past year, the PCE price index has risen 1.8% and the PCE core price index has increased 1.9%. The Federal Open Market Committee (FOMC) has established a target level of 2.0% for core inflation based on the PCE index. Low inflation provides an underpinning for the Federal Reserve to implement a cautious and prudent approach to monetary policy decision making.
2) Payroll Growth: The nonfarm payrolls increase of 312,000 in December was the largest increase since February, and the prior two months were revised up by a total of 58,000 jobs. Also, the average workweek rose by six minutes to 34.5 hours. As more people joined the labor force, the unemployment rate increased to 3.9%, which is below the figure regarded as the full employment level by the FOMC.
Aggregate payrolls, which combine payrolls, hours, and earnings, increased 5.2%
on a year-over-year basis. This increase has positive implications for personal income and consumer spending growth in 2019. The labor participation rate now stands at 63.1%, equal to the highest rate since March 2014. The broadest measure of unemployment is the underemployment rate, which now stands at 7.6% and has re- turned to the levels that prevailed in 2007. This rate measures those working part- time for economic reasons along with the long-term unemployed.
Rising Unemployment Claims: New unemployment insurance claims are released weekly and provide data on the number of individuals filing for unemployment insurance for the first time. Claims are useful in measuring the health of the labor market in terms of layoff activity and a rising trend can serve as a harbinger of future economic weakness. The four-week moving average of new claims provides for the smoothing of weekly volatility. Weekly figures can be distorted by dislocations related to short-term factors, including extreme weather conditions.
3) Rising Unemployment Claims: New unemployment insurance claims are released weekly and provide data on the number of individuals filing for unemployment insurance for the first time. Claims are useful in measuring the health of the labor market in terms of layoff activity and a rising trend can serve as a harbinger of future economic weakness. The four-week moving average of new claims provides for the smoothing of weekly volatility. Weekly figures can be distorted by dislocations related to short-term factors, including extreme weather conditions.
The trend of initial unemployment claims has remained highly favorable over the last three years, and the four-week moving average remains close to 49-year lows. Most companies are currently retaining workers as the labor market tightens. The job quit rate suggests that worker confidence is high, and the number of job open- ings continues to outpace the number of qualified job applicants.
4) Inverted Yield Curve: The yield curve measures the current yield on U.S. Treasury securities over the full maturity range from short-term rates to the 30-year U.S. Treasury Bond. The slope of the yield curve shows the term structure of interest rates and provides a strong indication of the health of the economy. During the late stages of monetary tightening cycles, the yield curve tends to invert, as short-term rates exceed long-term rates. This typically occurs prior to the onset of recession, therefore yield curve analysis provides valuable input into the out- look for the economy and the stock market.
There have been seven recessions in the last half-century, and each one has been preceded by an inverted yield curve. When the yield curve is positive, as it is now, the risk of recession is low. We prefer to use the same yield curve measure that is included in the Leading Economic Index. This measure compares the current federal funds rate with the 10-year Treasury rate. The spread between these two rates has narrowed considerably over the past year while remaining positive. The federal funds rate is currently 2.40%, while the 10-year Treasury yield is 2.64% leaving a positive yield spread of 24 basis points.
5) Leading Economic Indicators: The Conference Board Leading Economic Index (LEI), which gauges future economic growth, edged down 0.1% in December based on the preliminary data which includes some estimated figures due to the temporary par- tial government shutdown. This follows a 0.2% increase in November and supports our view that Gross Domestic Product (GDP) growth will slow down in 2019.
In the second-half of 2018, the LEI increased 1.5%, considerably slower than the 2.7% growth during the first-half of 2018. Overall, the strengths among the lead- ing indicators remain more widespread than the weaknesses. The Coincident Economic Index, which measures current economic activity, increased 0.2% for the month and rose 1.2% during the six-month period through December, 2018.
The estimate for real GDP growth in calendar year 2019 remains within the 2.0% to 2.6% range. The key variable going forward is the extent to which the United States-China trade war impacts U.S. exports as well as imports to domestic companies and consumers. Continue to regard the trade war as the wildcard in the 2019 economic outlook.
The estimate for 2019 S&P 500 operating earnings remains within a range of $165 to $170, with the outcome of the trade war negotiations a factor in determining the eventual earnings figure. My estimated price/earnings ratio range of 16 to 17 times operating earnings provides the potential for the S&P 500 Index to challenge the 2900 level within the next year if the trade war is resolved - might go as high as 3000.
My estimate of FMV of S&P 500 is in the range of 2650 to 2890.
